When Big Pharma Pays To Stall Generics, Is It Legal?

The Federal Trade Commission has long held that brand-name pharmaceutical companies may not pay generic-drug companies to stay out of the market. These payments usually arise in the settlement of patent infringement cases brought against generic drug makers in response to Abbreviated New Drug Applications (ANDAs) filed by generic drug makers with the FDA.

To its dismay, the FTC has had great difficulty convincing the courts that its dim view of such “reverse payments” is correct. In the past, opinions from three different courts of appeals have upheld such settlements, saying that they do not violate the antitrust laws as long as the brand-name drug company does not seek to expand the scope of its patent rights.

Last month, in In re: K-Dur Antitrust Litigation, the Third Circuit Court of Appeals sided with the FTC. Oddly, this case involves the same drug companies and the same settlement agreements that were upheld by the 11th Circuit Court of Appeals in 2005.

How did these conflicting decisions come to be? The answer is that the recent case was an administrative action brought by the FTC against the parties to two settlement agreements. The older case is a class action brought by purchasers of the branded drug, a case in which the FTC filed an amicus brief.

The July 2012 decision of the Third Circuit involves Schering Plough’s K-Dur drug, a sustained- release formulation of the generic drug potassium chloride, used to treat high blood pressure. In 1995, Upsher-Smith Laboratories and ESI Lederle, both generic-drug makers, filed ANDAs asserting that their proposed generic versions of K-Dur did not infringe the Schering patent because their timed-release technologies differed from the patented technology. Schering sued Upsher and ESI for patent infringement.

Upsher said that Schering’s claim of infringement was baseless and brought in bad faith. Nonetheless, Upsher settled with Schering on the eve of trial and agreed to abandon its plans to market a generic K-Dur.

The Upsher settlement agreement contained a cross-license, not uncommon in such settlements, by which Upsher licensed some technology to Schering and Schering agreed to pay Upsher $60 million. Schering also settled with ESI, agreeing to pay it $15 million. To this day, Schering has not introduced a product using the technology licensed from Upsher. The FTC said that this license back to Schering was merely a pretext to justify Schering’s $60 million payment.

Various private parties such as CVS, Rite-Aid and Walgreen sued Schering in 2006, alleging that the settlement agreements violated the antitrust laws. A federal judge in New Jersey dismissed the complaint, following the reasoning of the Second, 11th and Federal Circuits, which had affirmed a patent holder’s right to pay a potential competitor not to infringe its patent.

In doing so, the judge ignored a somewhat older decision of the Sixth Circuit holding that reverse-payment agreements are per se violations of the antitrust laws, as well as a D.C. Circuit Court opinion that also questioned their legality.

On appeal from the district court’s dismissal of the case, a three-judge panel of the Third Circuit issued an opinion that forcefully disagreed with the trial court and remanded the case for a trial. The panel confronted head-on the rationale of the other courts that had upheld reverse-payment settlements.

The so-called “scope of the patent” test espoused by the other circuits would allow reverse payments if (1) the exclusion of the generic drug company from the field does not attempt to exceed the scope of the patent, (2) the patent holder’s claim of infringement was not objectively baseless, and (3) the patent was not procured by fraud on the PTO.

The Third Circuit concluded that, as “a practical matter, this test does not subject reverse payment agreements to any antitrust scrutiny.”

The court disputed the strong presumption of patent validity that underlies the “scope of the patent” test. It noted that the statutory presumption of patent validity was intended to place the burden of proving invalidity on the challenger, but not to raise the bar so high as to be insurmountable.

The Third Circuit also took issue with courts that shrugged off concern about reverse-payment settlements by reasoning that there would always be another generic manufacturer willing to challenge a weak patent. The court took note of one instance in which a brand manufacturer paid four separate generic makers to stay out of the market.

Getting to the heart of the matter, the court noted the strong public policy in favor of putting patents through the acid test of legal challenges, pointing to several Supreme Court pronouncements that public policy favors the right of challengers to test the validity of patents.

Considering that the Hatch-Waxman Act was intended to increase the availability of low-cost generic drugs, the Third Circuit said that this goal was undermined by a reverse-payment settlement which “nominally protects intellectual property, not on the strength of a patent holder’s legal rights, but on the strength of its wallet.”

The court also rejected the notion that a policy favoring settlements should trump the policy disfavoring monopolistic practices.

Having refuted the rationale advanced by the other courts of appeal, the Third Circuit set forth the standard that it expects the lower court to apply on remand: Any payment received from the patent holder is prima facie evidence of an unreasonable restraint of trade.

The patent holder may rebut this inference either by showing that the payment really was for something else (a notion that provokes the Third Circuit’s deep skepticism), or by demonstrating a pro-competitive benefit (such as by keeping a marginal generic-drug maker solvent).

In re: K-Dur Antitrust Litigation is the first court of appeals opinion to reject the “scope of the patent” test embraced in earlier decisions by three other courts of appeals. It established a presumption that payments made in any side deals (e.g., supply agreements, cross-licenses, etc.) are in fact payments to increase the time when the generic drug maker will sit on the sidelines. As such, it represents a major victory for the FTC even though it was not a party to the case.

By coincidence, another case that reached the opposite result is also ripe for an appeal to the Supreme Court. The 11th Circuit recently followed its own “pay-for-delay” precedent in FTC v. Watson Pharmaceuticals. That court of appeals denied Watson’s request for a rehearing only two days after the 3rdCircuit’s K-Dur decision.

The Supreme Court has until now refused to hear appeals of cases involving the propriety of reverse-payment settlements. In light of the likely appeals from both Merck (which now owns Schering) and the FTC in cases reaching opposite results, the Supreme Court will probably feel compelled to tackle this issue at last.

Copyright 2012 Sunstein Kann Murphy & Timbers LLP, all rights reserved. Thomas Carey is the chair of the Business Practice Group at SUNSTEIN.